Why are banks so fond of boards with independent directors? What is the big deal?

Actually, banks are interested for the same reason as minority and non-executive owners in a successful multi-generational family business. Independent directors with real fiduciary responsibility have an obligation to work in the interests of all owners; not just those running the business, not one branch of the family, but everyone whose capital is at risk – including banks.

In business school, it is called Agency Theory: the potential that managers of a business will make decisions that are better for themselves than for owners who don’t manage the business. Things like executive compensation and perquisites are often a concern for owners who don’t share in them. How can all owners be sure they aren’t paying too much to run their business? Would dividends and other distributions be greater if management didn’t spend so much on their “pet projects?”

These are the same issues that banks worry about. The Warwick Business School study I cited previously concludes that when businesses don’t have a strong corporate governance process with independent directors, banks react by imposing their own controls through more restrictive lending terms. Family owners who are not convinced their capital is being managed properly may attempt to impose their own controls by second guessing management and raising doubts with other shareholders. Sometimes their behavior becomes a strain on the cash position of the business if dissident owners want to be bought out.

This is a question often asked by our clients when we discuss corporate governance. It is a fair question when the owners of a successful family business are contemplating the creation of a fiduciary board of directors – why should they include non-family, non-owning, non-management, members with full voting rights? Of course, the right independent directors bring valuable, relevant business experience to your business. But, it can be argued that consultants and/or advisory board members bring that value without having to give them a vote. In other words, can we get their advice without being bound to use it in our decision-making process?

Good advice is always valuable but independent directors on a board designed to represent the interests of all the owners of a business have been shown to add much more tangible value. A study of 1,300 U.S. firms recently released by the Warwick Business School in England shows that banks loan on more favorable terms to businesses with independent directors on their boards. This study, done over a period of 13 years, shows repeatedly that as the number of independent directors on boards in these companies increased, the terms of their loan agreements with banks improved in the company’s favor.

The issue comes down to this: When there is an effective system of corporate governance in place, indicated by the presence of independent directors, banks have greater confidence in a firm’s internal controls and don’t feel they need to impose as much external control through their loan covenants.

How’s this for real value? A better relationship with your bank can yield a lower cost of capital in your business.

On a long cross-country flight, I sat next to a woman who was involved in her family’s business and she shared her family’s fascinating story. Working with a consultant, her family had put a lot of time and effort into creating a family constitution as well as policies, procedures, and protocols. She and her husband, his sister and her husband, as well as the eight cousins—who would all one day be owners—got along famously and had great fun designing the documents.

Then sadness crossed her face as she confided, “As wonderful as our agreements were, and you should have seen the celebration we had when they were ratified, the documents were never taken seriously by the senior generation. The new policies were ignored, and the rest of us felt betrayed. We had spent so much time and money on the process, and now my husband doesn’t speak to his sister, and my children no longer get along with their cousins.”

As the plane descended through the clouds the woman said, “When you work with families like mine, please tell them how important it is to honor the agreements they create. It just takes one little snag to unravel the whole thing.” I assured her it wasn’t too late to fix the situation, and I urged her to reconnect with her family business consultant. I told her she might want to suggest a meeting with the senior generation to discuss how best to handle the breach of trust that had taken place. Her family could also take a second look at the documents to be certain they weren’t too constricting, but most importantly, they needed to start communicating again.

As we walked toward the terminal together, she said she would take my advice if I would take hers: she would call her consultant if I would remind families to keep their promises to each other. When we write family agreements, we have to be sure they are promises we can keep, so if promises have been broken, we need to keep the channels of communication open.

Even though conflict is 100% predictable, completely unavoidable, and decidedly uncomfortable, many family owners avoid having disagreements at all costs. They don’t realize that smiling sweetly and yet again swallowing bitter bile only causes resentments to grow and unresolved issues to fester. Putting issues on the back burner causes emotion to boil over—probably at the most inopportune time.

An old axiom to remember is: “Choose your battles wisely.” Ask yourself if the conflict is a big deal in the first place and really needs to be addressed. It helps to remember Thomas Jefferson’s advice: “When angry, count to ten before you speak. If very angry, a hundred.” Screaming and yelling when you have a conflict with a family member is guaranteed to make a bad situation worse. Wait until you have calmed down or maybe even slept on it before broaching a sticky subject in your family business.

If the shoe is on the other foot, and your sibling is screaming at you, heed the advice of famed psychologist, Murray Bowen, who recommends in Family Systems Theory: “Don’t attack; don’t defend; don’t go silent; just remain neutral.” Bowen taught that screaming only escalates the fighting, but not saying anything at all could worsen the situation too.

If your cousin begins to lose her cool, agree to talk about the issue later when both of you are not in the heat of the moment. You will have a much better opportunity for successful resolution when you have two calm, composed people who are honestly and openly sharing their concerns. Carefully listening and paraphrasing back to each other what has been heard can be most productive.

In my family, we have a wonderful expression: “No matter how thin the pancake, there are always two sides.” Sometimes the solution is serendipitously obvious when each person is heard and feels understood. Family relationships are some of the most precious sources of happiness in our lives, so learning to deal with conflict constructively and confidently is worth the time and effort.

The definition of “family” and its members continues to evolve. Bruce Jenner’s transition to Caitlyn has created quite a buzz. It is estimated that 700,000 Americans, 0.2% of the population, are transgender. On June 26, 2015, the U.S. Supreme Court ruled that the U.S. Constitution guarantees the right for same-sex couples to marry in all 50 states.

Lesbian, gay, bisexual and transgender (LGBT) people are and will continue seeking committed, lifelong adult partnerships and many will raise children. These societal changes, whether you are in favor of them or against them, are a fact. It is also a fact that many multi-generational family businesses are composed of family members who live outside the traditional “Ozzie and Harriet” family world.

Some families try to hide these facts. However, more and more are displaying open acceptance of those living differently from themselves and welcoming family members into the business. Tim Cook, CEO of Apple, is showing the business community that a gay person can lead and grow what many consider the most innovative, highest-valued enterprise on the planet.

We serve family firms with LGBT family members who are contributing to the well-being of business. We also observe family members who have not felt welcomed and therefore have chosen other career options outside the family business. While family firms tend to be more conservative and slower to accept these societal changes, those that have been more welcoming have helped their own culture evolve while developing a more tolerant and understanding value in the workplace.

Every family contains some level of common background, political and religious persuasions, and perspectives on business and family life. One fourth-generation family business in the Midwest is identified with many shared interests, including Catholicism, Polish heritage, Loyola Family Business Institute, Democratic Party, Chicago White Sox and Pulaski Days!

However, there are some family members who have opted to diversify their views, lifestyles and career pursuits. The more common are family members’ interests, the more homogeneous is the group. The more diverse, the more heterogeneous is the group.

There is no right or wrong answer.

It is only natural that the larger the family grows, the more diverse it becomes. Spouses (in-laws) help to introduce diversity since they have often lived in different locations and been brought up in different family situations. While we find many family members still living in a rather homogeneous family group, many families are moving towards greater heterogeneity. This can be a healthy factor, but can also create tension that requires greater sensitivity, acceptance and creativity to take advantage of the greater diversity.

Acceptanceand understanding of those who choose to pursue other paths can determine whether or not a family business continues for multiple generations. Celebrating diversity and learning how to take advantage of the different skills and perspectives is more likely to produce a harmonious family.

We often talk about the many hats each person wears in a family business. On the business side, one individual may hold the titles of Chairman and CEO, or CEO and COO. On the family side, one person can serve as both the Family Council Chair and Education Committee Chair. Individuals that take on leadership in multiple roles in this way are to be greatly appreciated, as with multiple leadership roles come multiple responsibilities.

A challenge develops over time when the “multiple hat”-wearer begins fusing the roles and sees all of the accepted responsibility as “just my job.” His or her ability to differentiate between the two–or more–roles may become lost over time due to task familiarity.

As succession approaches and it’s time to transition these responsibilities to others, it can be a bit perplexing as to how the various roles should be split. Without clarity around this question, when a shift is made to allow different individuals to take on the newly split roles, role confusion and frustration are likely to occur.

A quick example: Arnold had occupied the position of CEO and Chairman. As Arnold neared the age of transition (in his mid sixties), he determined that the business would be best served by keeping his role as Chairman, while his daughter Alyssa – who had demonstrated much competency over time and earned the position – assumed the role of CEO. Over the many years of holding both the Chairman and CEO roles, Arnold became quite used to behaving in a certain way. With the new split in roles, he found himself stepping on Alyssa’s toes inadvertently which caused both confusion and conflict. This caught Arnold by surprise – not a lot of planning went into the role division as they just figured they could work it out over time due to their close relationship.

New approach: Arnold is suddenly struck by the lack of formality he has given to this situation. He initiates an exercise whereby each role would be defined clearly in terms of its expectations, responsibilities and reporting relationships. He includes Alyssa in this process and they work through areas of confusion by asking their Board members for input in the job descriptions they are working on. Once they have agreed on their positions and reporting relationships, and how they will communicate about the business (frequency, content), the tensions seem to melt away. This allows each of them to function independently and motivates Arnold to give Alyssa space to be the CEO while he focuses on being the Chairman.

Arnold’s lesson: Just because you are family does not mean you always have to act like it. Splitting roles, whether they are family or business roles, requires forethought and advance planning. By approaching the splitting of long standing roles as a professional exercise, Alyssa and Arnold enjoyed a much improved working relationship, which made life easier both at work and at home.

Over the past 25+ years of consulting with family businesses, I have been witness to some incredibly effective family business leadership teams. They have a sharpened edge when it comes to making decisions. Not only are their financial results impressive, but the nonfinancial impacts to their families, employees, customers, industries, communities and philanthropic interests are even more remarkable.

In reflecting on the common ground leading to their effectiveness, the following attributes are noteworthy:

They are clear about the strategic direction of the family’s business and their family is committed to the strategy.

They have sufficiently transitioned responsibility for day-to-day operations to be able to spend adequate time focusing on strategic matters.

They continuously focus on building trusting relationships throughout their families and their enterprises. As a result, their speed of decision making matches the urgency of opportunities presented and challenges faced.

They understand the underlying variables that drive their business model and they have access to and use metrics to ground their decisions.

They understand the final call on a decision is based on judgment and they have built confidence in and rely on their judgment.

They cast their net wide for input from their families, management teams and external resources.

They are determined enough to continue with execution through difficult and unforeseen challenges, yet humble enough not to escalate commitment of talent and capital “just to be right.”

Take some time and engage your leadership team in a discussion about effective decision making. Questions to consider asking:

What are the attributes that drive the effectiveness of your leadership team’s decision making?

Do you have any gaps? If so, how might you start to fill them?

What needs to be done today to extend the effectiveness into the next generation?

Some reflection today can sharpen your decision making edge for tomorrow.

The New York Times columnist David Brooks focuses largely on parsing behavioral science and moral philosophy for practical use. His most recent books, “The Social Animal” and “The Road to Character” are worthy reads in this regard.

In a recent column, Brooks probes the role of “family” in society. He notes that individuals “emerge out of families…” and that “the family… is the essential social unit.”

He then turns to statistics that are familiar to all who work with family businesses, concerning the prevalence and performance of family businesses. He also notes the frequency of multigeneral family heritage in politics, and fields like music, sports and literature. (And he could have added science, law, or virtually all other fields.)

Probing why this should be the case, and without mentioning genetics, Brooks offers five reasons why “certain families are breeding grounds for achievement.” These include:

Identity formation by which growing up in a certain kind of family lets you think of yourself in those terms at a young age.

Practical knowledge learned by the example of one’s kin rather than in a classroom or a book.

Level of skills that are cultivated and accumulated across generations. (“It takes three generations to make a career.”)

Audacity in which you can dare seek high achievement because of role models in your family.

Time horizon in that families think and work for the long term, seeking to pass a legacy to those not yet born.

Some people think that being born into the “right” family confers unfair advantages, says Brooks. “Families are unequal.” And while that makes it harder for others to compete, the result is to make “society as a whole more accomplished.”

His conclusion: “We wouldn’t want to live in a society in which family influence didn’t happen.”

All those who see their family enterprises as precious to their owners, employees, customers and communities, and mightily strive to maintain and grow all dimensions of their family’s legacy, can thank David Brooks for his recognition of the reality and importance of what families who work together accomplish.

Have you ever walked out of a meeting thinking that it went very well, only to learn later that many in the group were frustrated and discouraged?

Or, have you worked hard to formulate your thoughts for a meeting and then just couldn’t find an opportunity to voice them?

The differences between extroverts and introverts in planning and decision making processes have a direct impact on how people feel about their roles, their ability to contribute and, ultimately, the success of the endeavor.

Adam Grant of Wharton, Dave Hofmann of the University of North Carolina at Chapel Hill, and Francesca Gino of Harvard conducted a study within 57 locations of a pizza chain to determine the impact on profitability of extroverted leadership when the employees were passive versus proactive.

They found that extroverted leadership was linked to significantly higher profits when employees were passive, but significantly lower profits with employees who were proactive. In Gino’s Harvard Business Review article about the study, she notes that in stores with passive employees, those led by extroverts achieved 16% higher profits than those led by introverts. However, in stores with proactive employees, those led by extroverts achieved 14% lower profits. The results suggest that introverts can use their talents more effectively with proactive team members because they are more open to those who champion new visions, promote better strategies and introduce changes.

Understanding and managing the dynamic in a group is essential to being able to have effective discussions. Extroverts have a tendency towards group interaction, talking to think and sharing ideas openly — they gather their energy from the group. Introverts don’t like to be interrupted, often prefer quieter environments and need to think before taking action or speaking. They gather their energy with quiet time, reflection and focus on topics of importance to them.

Structuring family business meetings to take into consideration the differences between introverts and extroverts levels the playing field, and provides a platform for everyone to be heard.

As a new client recently said, “We are listening to each other better, but we need to quiet the talkers so that they can hear the other great ideas!”

What can you put into place to encourage everyone to have a voice?

Here are a few ideas that have worked for other families:

Learn about each other’s personal style. Take an assessment like the Myers Briggs and learn about how people gather information, make decisions, gain energy and deal with the outside world.

Provide the materials for a meeting well in advance of the meeting.

Agree to read meeting materials in advance. Consider providing a “pre-meeting” time on the agenda for those who have a tendency to do it at the last minute.

Identify specific questions in an agenda for those who need time to reflect and collect their thoughts.

Offer an opportunity for meeting participants to ask questions in advance of the meeting to obtain clarity on a proposal.

Open the meeting by asking each person in the room to answer a question, setting a time limit for the answer. Use the opportunity to get to know each other better, share insights and practice listening to each other.

Have the group leader or facilitator actively create an opportunity for each person to speak, while encouraging the louder voices to enjoy the listening process.

Break into small groups, even twosomes, to bring out the thinking of those who may be less apt to speak up in a group scenario.

Offer opportunities for participants to write down their thoughts and have the facilitator read them out anonymously.

Have each person speak directly to the facilitator, not each other, if the topic has a lot of emotion attached to it. Invite others to ask a question of the speaker, but direct it to the facilitator.

Take breaks frequently to allow time for those who need to gather their energy and process ideas.

Focus on creating a valuable discourse, dig deep into insights and allow for thoughtful debate.

Let us know if these ideas work for you and what you have tried to bring everyone into the room effectively!